Monday, November 30, 2009

A large stimulus can be done through reconciliation, and therefore need only 50 votes plus the Vice President, if it's deficit neutral. But how can it be deficit neutral and still be a stimulus? One answer is that for reconciliation it must be deficit neutral over a period of 10 years (see here and here), so put in the spending now, and the tax increases, on the very wealthy, to more than pay for it 5 or more years later. If unemployment is still high by then, do another one of these stimuli at that time.

Yes, the Republicans will howl. They can't say it will explode the deficit (with much traction), because it's deficit paying. And, in fact, if the tax increase is a large permanent one on the wealthy, as it should be, the CBO score could show it paying down trillions in debt over 20 years to satisfy the deficit hawks. Nonetheless, the Republicans will, of course, say that the economy, and civilization as we know it, will end because taxes are being raised, despite the fact that Bush had massive tax cuts for the rich and brought us to the brink of a depression and trillion dollar deficits, while Clinton raised taxes and turned record Republican deficits into record surpluses, and had the longest economic expansion in U.S. history. I sincerely hope that if this happens Obama will end his harmful aversion to touting the achievements of the last Democratic president. The constant reply to Republican claims of disaster whenever taxes are raised should be Clinton, Clinton, Clinton (and in California Pat Brown, Pat Brown, Pat Brown).

And it's crucial for the Democrats to understand that any negative at the ballot box from the Republicans screaming tax increase, will be swamped many, many times over by passing a stimulus, and jobs programs, that will make unemployment and the economy far better by election time. A bad economy at election time, that's improving very slowly if at all, will hurt the Democrats immensely more than the Republicans screaming about tax increases which will be only on the very wealthy. Unfortunately, it may be too late for great improvement by the 2010 midterms, but strong action now would also greatly improve prospects in 2012, when not only much of congress, but also you know who, is being voted on.

Thursday, November 5, 2009

Having a Nobel Prize winning economist (and in my opinion one of the greatest in history) writing a popular newspaper column has done tremendous good. Before Paul Krugman we had no one who was a great expert on economics writing a weekly popular newspaper column for the general public on economics and political economy. The result was that far too many people learned harmful, or extremely harmful, misconceptions from Robert Samuelsons posing as economists.

Wouldn't it be great if we could have a Paul Krugman for the physical sciences? In fact, we have what looks to be an excellent candidate, Nobel Prize winning physicist Burton Richter. Dr. Ricter is a finalist in the Washington Post's America's Next Great Pundit Contest.

It's extremely important in today's far more advanced world that the public and politicians understand scientific and technological issues and how they relate to politics, economics, and society in general. Ricter's two contest columns show an exceptional ability to meet this need. The first one is especially good, "Separating partisanship from technology". Here is a sample:

So many things in front of our Congress involve science and technology issues, including limiting greenhouse gases, renewable energy programs, equal treatment for all on the Internet, nuclear weapons reliability, computerizing medical records, computer vulnerabilities, etc. It is odd that Congress has no organization of its own to analyze these sorts of things. It has a trusted Congressional Budget Office to referee arguments on program costs, as was done recently on the cost of the Senate health-care reform bill, but Congress has nothing to analyze the impact of technology.

It was not always so. In 1972 Congress decided that knowledge was power and created the Office of Technology Assessment, so that it would have its own nonpartisan organization to look into the effects of technology on legislation and on the country. In 1995 it decided that ignorance was bliss and abolished OTA as part of the Gingrich revolution, in order to save about $20 million out of a congressional budget of $2 billion. It has been blissful ever since, getting its information on science and technology issues from outside organizations that too often have serious conflicts of interest.

And I would add that that $20 million the Republicans "saved" was just 1/350,000th of our $7 trillion GDP in 1995. The smarter science and technology related policy, legislation, and spending that $20 million could have contributed might easily have resulted in an increase in GDP of $20 billion, 200 billion, or much more, and then there are externalities and international benefits. It was an incredibly high return investment. Talk about being penny wise, pound foolish. This was stupid even by Republican standards.

Wouldn't it have been valuable if we had a columnist like Burton Ricter writing about this at the time. Like Paul Krugman, a columnist like this could do tremendous good.

But even if this were an active area of research in journalism, would that be a reason for economists to ignore it? Would it be social utility, or GDP, optimizing for economists to say let's have only journalism academics and professionals work on this?

Think about it.

The answer is of course not.

This would be grossly inefficient. Economists have unique skills they could bring to the table for this very economics related issue that Journalism professors and practitioners don't have. Studying this well and coming up with effective solutions is tremendously aided by advanced knowledge and skills in economic cost-benefit analysis, externality theory, political economy, econometrics, incentive and game theory, and more.

Given the enormous costs of these externalities it would be extremely high return to have a branch of economics working on them, and hopefully in conjunction with other fields like journalism, law, and political science, as these fields clearly have unique things to bring to the table that are also important regarding this issue. One of the biggest sources of inefficiency in social science academia is that the reward/penalty system greatly discourages working with professors in different fields (or in groups larger than three, at least in econ and finance), but it still happens sometimes, and hopefully would here.

Another problem with leaving this issue to journalism is that journalism professors and practitioners will be taken a lot less seriously in recommending solutions. First, addressing this involves subsidizing the positive externalities of journalism with large sums of money. So when journalism professors and professionals ask for this it looks like they are just doing it for themselves, to get more money, not because it's an extremely high return social investment.

If economists, however, recommend spending large sums of money to subsidize journalisms' positive externalities, it's not self serving. Their motives aren't suspect. And if they say it's economically efficient, that it's a very high return investment, they are taken much more seriously than professionals in journalism, or any other field, as after all it's economics, the study of economic efficiency and growth.

And economics is, in fact, amongst other things, the study of economic efficiency and growth. So we should definitely not be extremely socially inefficient ourselves by ignoring the monumental inefficiencies from the externalities of journalism. But so far that's just about what we've done.

Sunday, October 18, 2009

The media's gross dereliction in informing the public about the truth in response to extreme Republican misleading, outright lies, and just incompetence was a major factor causing the recent generation of Republican dominance. The costs to America and the world have been monumental.

Simple-minded, anti-thinking Republican economics leads to gross societal underinvestment (especially in projects of great social return, like basic science and medicine, infrastructure, alternative energy, education, etc., things that due to well established in economics market problems will be provided by the free market at a level far below that which maximizes social utility). What we get instead is over consumption – predominantly for the rich, i.e. yachts, mansions, and $20,000 watches instead of cancer research, alternative energy, and college student aid so that students can study more and flip burgers less.

Their simple-minded, government is always bad ideology leads to severe problems and inefficiencies, as it is long established in economics that there are many, and often severe, free market problems (externalities, asymmetric information, inability to patent, monopoly power, transactions costs and other frictions, etc., etc.). These will result in great inefficiencies without a substantial government role. Thus, what we get with the Republican dismantling and corrupting of government is low growth, especially long term, and many other horrible things, including acute bubbles that can lead to severe recessions.

Then, with enough Republicans in power to block smart government remedies, we can have Hooverism and depressions. This is something we came very close to recently, after the effects of a generation of Republican damage lead to the worst economic crisis since the Great Depression. Luckily, we had a new Democratic president, and a congress that was pretty Democratic (but not that Democratic, as we've seen from the great worsening of bills that has been necessary to get them through congress). For more on this, including empirical evidence, see here, here, and here, and Nobel Prize winning economist Paul Krugman's books, written for laypeople, "Peddling Prosperity" and "Depression Economics and the Crisis of 2008".

But now let's put this in perspective. Let's quantify it to get some idea of the benefit better journalism could provide in leading to smarter voting, and therefore less of harmful Republican economic policy (Of course, the Democrats are far from perfect economically, but unlike Republican politicians, they believe strongly in thinking beyond dogmatic sound bites, and in science. As a result, their economic policy is far more intelligent and effective, especially over the long run).

According to figures from the Berea of Economic Analysis (BEA), real GDP growth has averaged 3.37% between 1930 and 2009. One might think of this as an average of 1% growth from poor, or Republican, economic management, and 5.8% growth from much better, or very Democratic, economic management (Note, I am using the proper geometric average here, not the common arithmetic average.)

Does it seem like I've included too much variance around the mean?

Take a look at the BEA numbers. You'll see I haven't included enough variance. The standard deviation is 5.06 percentage points. There's a lot of variance in annual growth. For example, -13.1% at the height of the Great Depression in 1932, 16.4% to 18.5% from 1941 to 1943 during the huge fiscal stimulus that was World War II, and more recently 0.4% in 2008 and 4.4% in 1998.

Of course, there are short term and long term issues, but considering all of the evidence and logic I've seen over many years schooling and study, I think it's realistic to think that smart growth economics could lead to at least 5.8% real GDP growth over a generation or two, and very Republican anti-investment, high consumption, high debt, anti-thinking, anti-competence, crony economics could easily lead to 1% growth, or much less – negative real growth.

What is some of that logic and evidence? I've presented a good deal of it in the links above, but consider this: Suppose the entire Bush II tax cuts, 1.8 trillion, which went mostly to the wealthy and super-rich, were instead spent on basic scientific and medical research. This would have increased total government spending on R&D over the decade approximately three fold. It would have increased total R&D spending from all sources, government and non, by approximately 50%.

[Calculations: Bush's big tax cuts occurred in 2001, 2003, and 2004, with the biggest in 2001. Thus, consider R&D figures for 2002. In that year total government R&D spending was $77 billion. Total R&D spending from all sources, government and non, was $266 billion. The data source is the National Science Foundation (see table 1). I use the same categorization and data source as Brandeis economist Adam Jaffe in "Trends and patterns in research and development expenditures in the United States", Proc. Natl. Acad. Sci. USA, Vol. 93, pp. 12658–12663, November 1996. Reasonably extrapolating the R&D numbers out a decade leads to my approximate figures. A quick ballpark way to see: If the $77 billion in government spending on R&D in 2002 were continued for a decade, that would be $770 billion. If the Bush II tax cuts were instead spent on R&D that would add $1.8 trillion to that $770 billion, for a total of $2.57 trillion, which is 3.34 times the size of $770 billion.]

With reasonable, moderate tax increases on the well to do, we could increase government spending on basic scientific and medical research many fold. Certainly that would do far more for long term growth than instead spending on yachts, mansions, $5,000 suits, and $10,000 watches. And this tax level would not have a substantial effect on work effort due to the well established income and substitution effects (please see here and here). The 1950s and 60s was a golden age of scientific and economic growth, and the highest marginal tax rate was always at least 70%.

So, I hope I've convinced you that good, highly Democratic, economic policy and governance could lead to long term growth of 5.8%, and bad Republican economic policy and governance could lead to long term growth of 1%. The table below then shows what that would lead to over a generation or so – 30 years. And it shows how much would be gained if efforts to address the externalities in journalism, lead to improved journalism, which lead to smarter voting, better governance, and better economic policy, which caused 10% or 20% movements toward the better growth. All dollar numbers are in trillions.

Click table to enlarge.

So, I hope this suggests that the gains from addressing the externalities of journalism effectively may be in the order of magnitude of tens of trillions of dollars per generation, and that is, of course, just the GDP gains. It does not include gains regarding war and peace, social issues, crime, and more. It also is just gains in dollars, not utils. If inequality were decreased along with the increase in GDP, the util percentage gain could be many times the dollar percentage gain. Finally, the many goods not counted in GDP, or undercounted, could also be increased greatly from addressing journalism's externalities effectively.

So how might we then address journalism's externalities effectively?

Here are some ideas:

1) A large tax credit for the costs of serious investigative journalism – This tax credit could be very large, 50% or more, to really change positively the quality and mix of what we see in newspapers, cable news, etc. In addition to reporters' investigation time and expenses, the credit could also cover the costs of fact checkers and research assistants, and the costs of consulting with experts, on-staff and outside, so that journalists could be sure, and will have the courage and confidence to state lies as lies, and not write "he said, she said".

Serious investigation and research is very expensive. That's a big reason why, in profit maximizing,circus, horse race, personality stuff so often wins out. Cut the costs of serious investigation by 50% – or 80%, with an 80% tax credit – and you're going to see far more serious investigative factual pieces. The profit maximizing equation changes. You won't have Paul Krugman complaining, "Back in 2004 I looked at TV reports on health care plans, and found not a single segment actually explaining the candidates’ plans. This time the WaPo ombud looks at his own paper’s reporting, and it’s not much better."

The tax credit could be done based on objective accounting expenses in a very clinical way, to allay fears of the government favoring/influencing media outlets.

2) Incentives/Favoritism for non-profit owned media outlets – This very directly gets at the problem of for-profit externalities. And it's a problem that's gotten a lot worse over the last generation. In the 2009 Handbook of Journalism Studies, John H. McManus writes:

Commercialism ebbed over much of the 20th century as codes of ethics were adopted and education levels and professional aspirations of journalists rose. But during the last two decades, and particularly during the last several years, as competition for readers and advertisers on the internet has intensified, commercial interference appears to be rising, at least in American news media.

Since the mid-1980s the corporations that produce news in the United States have begun to treat it less as a public trust and more as a commodity, simply a product for sale...(page 219)

A large part of this is that the Republicans have constantly, and with a powerful machine, drilled into this country over the last generation the message that greed is always good. This has done great harm to our country in so many areas because, of course, greed is not always good, and extreme greed is almost never good. Aside from externalities and a long list of other well established in economics market problems, there is the fact that this destroys the ability of people to trust each other and therefore to work together well, and at low cost, in the ever larger and more complicated groups and situations necessary for high-tech modern production.

With regard to non-profit media, current law has restrictions on their activities that discourage them, and discourage for-profit media from becoming non-profit. At least some of these restrictions should be removed, although this is an issue I'd like to study further before being more specific.

And I think we should do more, like adding subsidies for non-profit newspapers, cable news stations, and other media outlets, perhaps equal to 20% of news revenues, or more if necessary to create a strong and vibrant non-profit media sector.

The subsidies to non-profits could be provided in a very transparent, and clinical, accounting way to make sure the government is not favoring any outlets or points of view.

Of course, I'm just one guy, who amongst other responsibilities just started thinking about this. What in-depth, detailed, and well studied ideas might we have come up with if, in coordination with other fields like law and political science, even a small branch of economics had been working on this for the last few decades.

Update (day after initial posting): In today's news, "The New York Times plans to eliminate 100 newsroom jobs — about 8 percent of the total...The newsroom already has lowered its budgets for freelancers and trimmed other expenses, and employees took a 5 percent pay cut for most of this year...Nearly all papers in the metropolitan region have been cutting their news operations for years, and some have fewer than half as many people in their newsrooms as they did in 2000."

With a 50% or 80% tax credit for the costs of serious investigative journalism, there would clearly be a great deal of hiring, and expanding of newsroom capabilities, rather than the opposite. This would result in much more, and much higher quality, serious, substantive, factual, and investigative news, which, as I said, is a lot more expensive than horse race, circus, personality news.

This is something I've been banging my head against the wall about in the economics/politics blogosphere for over a year, leaving more than a dozen comments, with no traction (until just today!). Before last month's piece (and Mark Thoma today), the only person or site I have ever seen discussing the colossal externalities of the media and what government might do about them is Ezra Klein of the Washington Post. And I've spent almost two years reading or browsing over an hour a day many of the major economics and politics blogs and other online media. This includes reading at least the titles of over 90% of the links in Mark Thoma's outstanding and wide ranging Economist's View blog. But with all of this, the only one I had ever seen discuss this besides myself is Ezra Klein.

I'm not saying there's not someone else out there, but with how monumentally costly these externalities are, with the immense importance of this issue, it should not be so rare that even with the great amount of looking I've done all I've found besides last month's article (and Mark Thoma today) is Ezra Klein. Ezra's an extremely intelligent and talented blogger, but he's still just one person.

But what about the academic economics literature?

I did an extensive search of JSTOR, a vast and well respected database of academic journal articles and other works. It covers 97 economics journals, including almost all of the top ones. The journals are usually covered over extremely long periods of time. For example, The American Economic Review 1886-2006, Econometrica 1933-2006, The Journal of Political Economy 1892-2003, The Quarterly Journal of Economics 1886-2003, and The Review of Economic Studies 1933-2005.

I searched for the following words in the abstract:

1) Media and Externalit* (The "wildcard" character, *, includes any letters after it in the search, so externalit* will make the search include externality and externalities): 1 found, but it was not the main subject of the paper:

– "News as a Public Good: Cooperative Ownership, Price Commitments, and the Success of the Associated Press News as a Public Good", Stephen Shmanske, The Business History Review, Vol. 60, No. 1 (Spring, 1986), pp. 55-80

– "Advertising and Political Bias in the Media: The Market for Criticism of the Market Economy", Daniel Sutter, American Journal of Economics and Sociology, Vol. 61, No. 3 (Jul., 2002), pp. 725-745

So that's it, a grand total of three papers, and none of them were in top 10 economics journals. This isn't a branch of economics, it's a bud, and a bud that's been starved of nutrients and sunlight for a very long time.

Of those three papers, two dealt with the externalities between a media outlet and an advertiser. That means that in the entire vast search of JSTOR, with articles going back to the 1800's, I found just a single article that dealt with the externalities between a media outlet and a reader/viewer/listener.

And I found similar results in a search of the political science and public policy literature.

Doing the above searches for the entire text, and not just the abstract, yields many results, and you can pick through and find some that actually do discuss the externalities of the media, but this is not a subject of much serious research and of detailed remedies studied in depth. Another indication of this is that I have over twenty general macro and micro economics text books, graduate and undergraduate, and not one of them, in over 10,000 pages, says one thing about the externalities in journalism.

So, why are the externalities in journalism almost completely ignored in the economics/politics academic literature and blogosphere/media?

It's certainly not because the impact and importance are small, as I hope to show you in my next post...

Weitzman pointed out, however, that we are highly uncertain about the impact of greenhouse gas emissions — and that the form of this uncertainty is such that there’s a significant risk of utter catastrophe if we don’t act. This risk of catastrophe, he argued, is what should drive policy — and it argues for quick, decisive action rather than a gradualist, wait-and-see policy.

This argument convinced me; it’s one of the main reasons I’m a strong advocate of moving quickly on climate.

With my training and work mostly in finance, I put it in finance terms:

The risk-return tradeoff says that the higher the risk of an investment, the higher an average rate of return you will, or should, require. But it also says, conversely, that the lower the risk of an investment – or the more risk decreasing an investment – the lower an average rate of return you will happily accept.

What average rate of return do people happily accept for fire insurance for their home? A negative one, not just a low one, a very negative one. People even accept a very negative return for insurance on their car.

So what return would you accept for fire insurance on the planet you, and your children, and your grandchildren will live on? Scientists aren't that sure what exactly will happen with global warming. The feedback effects could get out of control and devastate the planet.

Stern's study justifies large spending on global warming even using positive rates of return (or discount rates). But when you use a negative, insurance like, rate of return, then clearly it becomes far more than worth it to spend at least moderate sums combating global warming, sums much greater than anything that's currently being discussed.

Krugman's post today justifiably severely criticizes Stephen Levitt. In his new book Superfreakonomics, he "quotes Weitzman, which cites his [tail] probability of utter catastrophe as if it were a reason to be skeptical of the need to act." When a full economics professor at a prestige school misses, or doesn't acknowledge, the argument that the risk of devastating losses justifies low, or negative insurance like, discount rates, it's evidence that we are not getting this message out enough in at least the professional media and blogosphere, and in fact, it's a message that I personally seldom hear, at least explicitly and clearly, in a great deal of reading of this media.

Thursday, October 15, 2009

Ezra Klein has alerted me that today is Blog Action Day, "an annual event held every October 15 that unites the world’s bloggers in posting about the same issue on the same day with the aim of sparking discussion around an issue of global importance." This year's issue is climate change.

So in doing my part I thought I would highlight a large study lead by Oxford trained economist Sir Nicholas Stern on the economic costs and benefits of global warming action. The study concluded that large expenditures to combat global warming were more than paid for by the economic benefits of avoiding potentially extreme global warming costs to the world.

One of the criticisms, though, was that Stern's team applied too low a discount rate to future economic benefits of decreased global warming. And some of these benefits are far in the future. For example, the report has forecasts of GDP in the year 2100.

If you look at the Wikipedia entry on the Stern study. You see several counters to the low discount rate criticism. Nobel Prize winning economist Kenneth Arrow says that the large investment in global warming action may be justified even with a discount rate up to around 8%. And in the face of somber new evidence, Stern in June doubled his estimate of the justified amount of spending on global warming (the original study was in 2006).

You also see a lot of discussion of things like pure time preference rates, not favoring the current generation over future ones, and comparison to market rates of return. But what I did not see, at least not explicitly and clearly, is the risk-return tradeoff. And this is something I have rarely seen in global warming articles and discussion. But it's crucial (an outstanding exception is a 2007 article in the Economists' Voice by Nobel Prize winning economist Thomas Schelling, "Climate Change: The Uncertainties, the Certainties and What They Imply About Action").

The risk-return tradeoff says that the higher the risk of an investment, the higher an average rate of return you will, or should, require. But it also says, conversely, that the lower the risk of an investment – or the more risk decreasing an investment – the lower an average rate of return you will happily accept.

What average rate of return do people happily accept for fire insurance for their home? A negative one, not just a low one, a very negative one. People even accept a very negative return for insurance on their car.

So what return would you accept for fire insurance on the planet you, and your children, and your grandchildren will live on? Scientists aren't that sure what exactly will happen with global warming. The feedback effects could get out of control and devastate the planet.

Stern's study justifies large spending on global warming even using positive rates of return (or discount rates). But when you use a negative, insurance like, rate of return, then clearly it becomes far more than worth it to spend at least moderate sums combating global warming, sums much greater than anything that's currently being discussed.

"Richard Serlin, who has made himself one of the world’s experts on Neil Wallace’s original paper, was good enough to agree to write a guest post..." – Miles Kimball, University of Michigan economist, and one of the founders of New Keynesian Economics

"Richard Serlin (HT Mark Thoma) gives the bottom line intuition of Wallace neutrality... " – Bruegal blog, EU economics think tank, considered one of the best in the world

About Me

I am an adjunct professor for the University of Arizona where I teach one of the largest personal finance courses in the country, with over 500 students per year. I hold an MBA from the University of Michigan and have completed all coursework and written exams for a Ph.D. in finance from the University of Arizona. I am also president and co-founder of Summit Personal Finance Education, one of the country's largest U.S. Trustees approved providers of a personal finance course, designed by myself, which meets the requirements for bankruptcy filers under the BAPCPA law of 2005.

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Policy Note

I edit and improve most of my posts after I initially place them. I will not hesitate to do this, and without cross-outs, as my main goal is to teach and discuss clearly and well, to help with understanding and good idea creation, not to leave a historically accurate evolution of my writing. In fact, if you think the writing of a post has clunky spots or mistakes, you might want to try looking at it hours or days later. These things may be fixed, plus valuable new material may have been added. My writing really tends to improve with seasoning.

I will, however, note if I have made a major change of opinion, or corrected an important mistake of fact that could be substantially harmful to a person or party. This is subject to interpretation, however. For example, if the post was up for two minutes before I fixed it, I may not write a correction note. Unless my blog traffic greatly increases, it's unlikely many people, or any people, saw it.